Investor Chat with Rebecka Löthman Rydå of Industrifonden

On April 21st 2021, I hosted “Investor Chat and Founder Pitch” event with Rebecka Löthman Rydå, the Investment Director at Industrifonden, with a long experience in VC industry and a passion for Foodtech, to the conversation about raising growth capital.

Industrifonden is an early stage venture capital fund based in Stockholm, Sweden.

We see today’s science and ground-breaking technologies as the foundation for the industries of tomorrow. That is why we seek out the most transformative ventures to invest in. Those with the power to change the way we live for the better and those that have a real, meaningful impact on society.

We partner with entrepreneurs, innovators and scientists whose discoveries are laying new ground for our future – for industries that may not even exist yet. We invest in early growth stages, seed to A round funding. Initial investments are typically 10-50 million SEK but we have the power to invest considerably more during our holding period.

We believe in being an active investor; in sharing our 40 years’ experience of scaling and growth. However, we do not take an operational role in our portfolio firms.

Our portfolio of companies spans the Nordics, but all have a Swedish connection.

According to Rebecka, there is no conventional way to get into VC, and her story confirms this. She started at Ernst and Young as an auditor and realized that she wanted to work on the operational side and contribute to a finance organization after a while.

She got recruited as a CFO by the entrepreneur and investor Tommy Jacobson, who had sold his company and started an investment company called Varenne AB. Varenne AB had invested in various businesses, like Marshall and Zound Industries.

Varenne AB needed a CFO to both work with their internal control and finance function but also with the companies in the portfolio. Rebecka did this for about a year when Tommy asked her to be the CEO of the company. As Rebecka says “I was naive enough to say yes!”.

From that point on, Rebecka got the opportunity to work with the investment side of things, worked a lot closer with the companies’ boards and got hooked on the investment role. After having her first kid and recruiting a new CEO, Rebecka stayed on the investment side, a position that she loves a lot.

Now, she is an Investment Director at Industrifonden and involved in companies like Adfenix, Apica Formulate, and DbVis Software. Rebecka introduced us to Industrifonden’s vision and their goal to find truly transformative innovation.

She gave great advice to the entrepreneurs about the importance of understanding the market they operate in and the expectations when they request funding.

In the really early stage, it's definitely about the vision. What do you want to create? What is your insight into the problem that you want to solve? Is that vision and what you want to build part of an overall transformation and part of a large potential market? And is there an interesting investment opportunity in that?

It's not going to be the best-looking pitch deck that wins, but the one that you get a sense that this founder really understands the market that they are approaching and really understands the problem and how their customers work and getting a sense of that understanding is the most important thing.

Rebecka also gave us a glimpse of the questions and the thought process a VC goes through when valuating a startup.

As a VC investor, you're always going to have a lot of failures because you're always following the Pareto curve. And even though you always think you're going to beat the Pareto curve, it always follows this 20/80, or even one in ten really successful companies, and then about half of them become nothing more, or maybe you just get your money back. That's just how the numbers work in our business.

The panelist included:

• Rodrigo Rios, Innovation Catalyst in Sony Startups Acceleration Program;
• Hannes van Lunteren, Head of Krinovafood & Business Designer from Krinova.

The following startups joined the pitching session:

• Katarina Furin, founder and CEO of Edgy Veggie, a Malmö-based start-up that produces good, healthy and sustainable seitan-based alternatives to meat.
• Adam Mikkelsen, co-founder of Raging Pig, which will allow humans enjoy the delicious taste of bacon without having to be a part of the, not so delicious, pig slaughtering circus.
• Josef Weidman, founder and CEO of Weiq.Tech, an app for more profitable restaurants.
• Mattias Djurstedt, founder and CEO of Nära & Naturlig, fish farming is the world's fastest growing food industry, Nära & Naturlig's vision is to produce fish in a sustainable way for the environment, fish and humans.
• Arash Sabet, founder and CEO of SimplyGrain, a Food-Technology Company with a focus on “upcycling” residue products to showcase the potential of not wasting anything.

You can re-watch the event and read the key learnings below:

Rebecka's early career

Q: Rebecka, you also worked as an investment manager for Zenith Group, which was funded by Tommy Jacobson, and together with them, you raised 300 million SEK to invest in Swedish tech companies. What are some of the exciting companies that you invested in?

Yes, I was part of starting up the Zenith funds, and we had time to make a couple of investments before I left. For example, we invested in True Caller. We also invested in Vionlabs, an ed-tech company called Strawbees, and an esport company called Strafe. And we had quite a broader but still tech-focused portfolio.

Industrifonden’s Vision and Strategy

Q: Industrifonden was founded in 1979, more than 40 years ago. You mentioned that it is a purpose-driven fund with a mission of creating the innovation of tomorrow. Now, you invest in early-stage startups in life science, deep tech and transformative tech sectors. Would you please tell us a bit about the history and the vision of the fund?

We've been around for over 40 years. We were set up as a fund but with a foundation as an owner. The foundation's purpose is to stimulate new technology and shape the industry of tomorrow, and to make sure that we find new innovations that can be part of shaping and transforming Sweden’s new industries that we need to be more competitive as a country, and that we need to meet the global challenges that we will face as a country.

So that's the overall goal. And we do that in three sectors, as you mentioned. So it can be anything from a new innovative drug to new material or energy solution in deep tech or a software company disrupting a new market in a novel way. So it can be fairly broad, but we have that purpose behind us, and it drives us.

Q: Would you please explain to us how Industrifonden's fund structure differs from a typical VC fund and how does that affect your investment strategies?

It's an evergreen structure, which means that we reinvest the money we make from an exit, and it also means that we don't have a fund that is closing in 5 to 7,8,9 years, which also means that we can take some slightly longer bets. Some of our most successful companies have taken a little bit longer than the typical fund size of 10 years, like Oatley. We've been owners in Oatley for almost 18 years, from the very beginning.

And the same with Oncopeptides that are publicly listed. We've also been owners for a very long time and took it all the way from research to an FDA approved drug. So yes, that's one of the differences.

Another one is that since we're not raising a new fund, we spend all our time on deal flow and on the companies we invest in, so we have a little bit more time to spend as active owners, which is an advantage.

And we can also be long term in terms of money. We can invest initially as little as 10 million SEK. But then we can follow on and invest up to 200 million in a single company, and we can follow on for a really long time. So that's another advantage.

Industrifonden’s Investment Requirements and Offerings

Q: How does your team in Industrifonden evaluate startups?

There are a lot of things we look at. We always start with the problem that the companies are trying to solve, and we try to really understand if this is a significant problem. Is that widespread enough? I

s it important enough to solve? And then, we also look at the "normal" VC things, like global potential uniqueness, scalability, competitive barriers over time. And the transformative aspects that I mentioned before which are connected to our purpose in the fund. Are they able to transform an industry in the right direction?

Or can this research enable purely novel technology to be created and enable new industries, even on markets? Then we always consider, does it move Sweden in a better direction? That's important to us.

We always consider the team, but I would say many other funds emphasize team a lot, and it almost feels like you have to fit into that mold as a founder. And at Industrifonden we can be a little bit more flexible.

For us, the important thing is that the founders are this kind of time travelers, able to see into the future almost, in terms of consumer behavior. Or how to operate differently on a market, or the need for new material that we can't see today, but we will need it in the future, and then through their products that will transform us into that future.

Or we want to see that they have this deep insight into a certain area and a new understanding of some things in a different way. And if they have that, with new technology, and everything else is in place, we can also work with one founder.

You don't always, as a founder, need to be CEO, or you can always talk with companies. Teams are important, of course, and you need to want to be in that ownership relationship together and do this together with an investor. But we can be flexible there as well.

Timing is really important, and timing is really hard now. The evergreen structure helps us to be a little bit more flexible on that side.

And then one last thing that I talk about a lot, and it might sound a little bit fluffy, but it's important; do you have an unfair advantage as a company? What is your secret sauce? What is your edge that will stay with you and allow you to become the category leader or builder in this market? That unique insight or knowledge or connections or whatever it might be or research or something that stays with you and makes you the winner in this category?

So yes, those were some of the things we look at. It's a long list!

Q: In which round does Industrifonden usually invest?

We can be a little bit flexible. We can enter fairly early. We typically want to invest at least 10 million SEK, which means it's often in a seed round. But we can also enter in an A round, and the recent investments we made have ranged from 10 million to 70 million, even in a vaccine company that we recently invested. So it can really be in a range.

Q: Does Industrifonden need to lead or is it ok if another VC leads the round?

We often lead. We like to syndicate, as well. It's not a must. But sometimes, we find it a benefit for the entrepreneur to have at least two VCs joining early on to help, so we often syndicate.

Q: Industrifonden spends quite a lot of time with the companies after investing. What kind of support can you offer to the companies after you invest in them?

We always take a board seat and want to be an active strategic adviser to the companies, and in between the board meetings as well, of course. And that's back to why people and relationships are important as well because you really need to make sure that you want to work together and that the founder wants to receive a bouncing board of ideas.

And here, we try to ask the right questions rather than always tell the companies what to do. At least that's how I try to work, to be a good challenger, rather than always giving answers, because we don't always have the right answers to everything. So it's more about the good challenging, a good bouncing board.

We also have a great network. We've been around for a long time, we've invested with many international investors, and we have a good investor network. We also have a good network of experts or ex-entrepreneurs that we have invested in that we still keep in touch with, and that network is really important.

Most investment managers or directors that you'll meet are half smart generalists. Sometimes really smart, but not always right. So, you really need them to know when they don't have the right answer and when it's the right time to involve an expert, and then hopefully have that network of relevant people to involve both as board members or as advisors to the company. So try to use some network of experts a lot.

Another thing is that we facilitate learnings between portfolio companies. We have a fairly large portfolio today. We have 60 companies. For example, tomorrow, we have a SaaS portfolio event, so all the 18 SaaS companies in our portfolio get to network. We have a speaker, VP of Marketing at HubSpot, who's talking about inbound marketing.

Then we have three SaaS growth investors joining in a panel today to get to ask them questions. So we try to have network opportunities between founders and between CMOs, or CFOs, so they get to interact. And I want to do even more, and we could do even more of those things.

Q: You have the hard facts, you have the market analysis, you have an analysis of whether this is a viable idea, you have an analysis of their vision, looking at the possibility for them to produce.

But in the end, if you look at, for example, what happened during Corona and the pandemic, things went upside down for a lot of businesses. And you see that it's the people that managed to do something with that. Especially in totally new markets, where there's the so-called radical innovation, where you're inventing a new product or a new market, it's very hard to predict what will happen.

So then, I (Hannes from Krinova) always find that people are more important than the idea, because you can always twist the idea. But if you don't have the right people you can't even do that. At Industrifonden, how do you engage with the people in the company? How does it work? How do you take more part in the board?

Hard questions as well, because people are really important.

But I also think if you have truly valuable technology on the line, or research or something, you can also pivot that research. So people are important, but we also value the innovation in itself a lot. And we emphasize that we want great teams, but we are open to also help in recruitment processes to find the right team.

I did an investment in a great founder that had built a software company, but he didn't want to be CEO anymore. And he was quite open with that. He said, 'It's not for me, I'm passionate about my product, and I want to work with the technology, and that's my goal in life'.

And we were fine making the investment anyway, even though he didn't fit the typical criteria for a founder and recruited a CEO to him to make it work. So we can be a little bit opportunistic and lean forward and take action sometimes to shape that team and leader. But yes, I agree, the team is really important.

And some of these companies that are our most successful companies today have pivoted, like Funnel did a pivot. And you have a belief in the founding team and their new investment or the new vision for what they want to build.

VC Capital vs other Financing Routes

Q: What are the most common reasons why you don't invest in startups?

Quite a few founders can build successful and nice businesses, but without having the true VC potential of their business, which means giving 10x returns in a reasonable amount of years, growing really fast, and becoming really big fairly quickly.

That's not for everyone, and quite a few companies I meet don't really have that potential for various reasons. Either because the market size isn't big enough, or they aren't able to scale fast enough, or the product isn't unique, and the market is really competitive, and we know that the pricing will go down, scaling will be hard, and the lack of that uniqueness is often a reason to say no. But it varies, for sure.

Q: In terms of fundraising, you mentioned that VC is not the only fundraising channel. You talked about other potential financing solutions such as factoring and getting support from the European Investment Bank. Would you please offer us some examples of how founders can leverage other financing tools than venture capital?

Venture capital shouldn't always be the number one choice. Even though I'm in venture capital, it's not for everyone. And there are advantages of being able to bring on other funding. You can build a really great business without venture capital in some cases.

So other financing ways to consider; there are several growth banking entities today. Nordeaand SEB have one that offers sort of guaranteed loans, so they can sometimes offer lending to quite good terms as well, and there's EIB, as you mentioned.

There is also venture debt which is not for everyone but could be an alternative for some. There are some Swedish, SEB has one, and DBT offers some lending. And Johan Crona Cloud Capital offers lending for SaaS companies. So there are more and more lending solutions with fairly attractive terms that are popping up.

Valuation of Early-Stage Startups

Q: Our startup (Mattias from Nära & Naturlig) is developing a land-based fish farm, and we are trying to raise our pre-seed or seed round. It is an industry that you need a lot of money on the first investment, compared, for example, to a SaaS business.

What is your main advice on how we could value the company as high as possible in this early stage because we need a significant amount of capital to build the facility?

That's a hard question without knowing enough about your company.

You often have a lot of IP value in your company and in the process that you would develop, for example, for your fish farming. This has value in itself, and it might mean that you don't need to talk about KPIs and revenue. In your case, you might have an actual technological value or an IP value in what you've already built that you might be able to attach some value too, in this fund.

But it's tricky if you need a lot of money upfront, for sure. So you might need to consider soft money, together with VC money or other options if a lot of capital is needed.

Q: We (Katarina from Edgy Veggie) have a budget that is based on what we sell today. In five years, we think that we are going to have a revenue of about 100 million SEK, and a margin of 12 million. And then investors ask us, well, how much will you be valued then? And we just don't have a clue. How do you think when you do the valuation?

That is really hard, and when looking at a product like alternative proteins, another thing to consider is how will this become commoditized? Then how many competitors will you have? What will happen to your pricing model? Will it go down? Will you be able to charge as much as now, or can your product become premium for some reason?

Because uniqueness is attached to your product at the moment, meaning you can charge more, but the competition will likely increase. Which is good; we want lots of competition. But what will you be able to charge in five years? And what will your margins be then? All these are attached to what your company will be worth. Of course, you're looking at multiples today, and you think, is this multiple going to develop in a positive or negative direction?

Your advantage is that it's really happening now. Consumer behavior is changing. Consumers are starting to leave meat products and "transform" into alternative proteins. And that's just the beginning, so hopefully, the demand for this kind of product will only increase. And if you have a unique and competitive product on a market that will hopefully grow even more and become even more volatile and hungry for new alternatives, maybe that can benefit you. But it is hard to predict.

As an investor, capital markets are a bit crazy at the moment. Enormous amount of capital flooding into the capital markets and record-high numbers of seed fund capital being invested. Valuations now are at an all-time high, so what will happen to them in five years? That depends as well on the world capital markets.

Q: As a VC at Industrifonden, what would you like to see from very early-stage startups before you invest in them?

In the really early stage, it's definitely about the vision. What do you want to create? What is your insight into the problem that you want to solve? Is that vision and what you want to build part of an overall transformation and part of a large potential market? And is there an interesting investment opportunity in that? So in early, early stage startups, it's a lot about the problem formulation, insight, and vision of what you want to build.

Then, of course, it's also about the founders' knowledge. Why are you the right people to solve this problem? Why do you have that unique insight? What is your background? Have you worked with a certain customer base for a long time and seen their pain points and problems and have that unique knowledge into solving them? Are you a researcher who has spent 10 years deep-diving into something and now wants to commercialize that research? So you can always look at the history of the founders as well.

Then, it's about the ability to attract good people. Even though it's early stage, you might have been able to bring aboard someone else with you either as a founding team or early employee. And that's also a good indicator that you're able to attract top talent and good people to your company.

Deep Understanding of the Market

Q: Every founder says that they're in a high potential market or industry. From an investor perspective, how do you evaluate this market as a truly high potential market?

This is always hard. It's especially hard if you're building truly transformative things and creating your own market as you go along. And some of the biggest winners, like category creators, are building their market as they go along. So you have to be able to predict and guess what the market will be like in a couple of years. And that can be really hard.

If you're operating within a product on a current market, you can always look at market research and reports. And here, a common mistake that I see companies make is they say; Oh, the e-commerce market is 700 billion euros in Europe, and we're going to take 1%, and that's going to make us great. And then that's the only market research they've done.

Of course, you might need to know your overall market size, but I really like companies that do a bottom-up analysis and think about what are their potential customers that they can actually target, they time what they are planning to charge those customers and understand how large is that market chunk.

Q: What do you expect to see in a pitch deck? What would make you excited to see in a pitch deck?

A pitch deck needs to include many things but starting, again, with a page where you're really defining the problem and what you want to solve. That's number one.

And it should include the understanding of your market and understanding other players in that market, competitors, partners, etc. That's definitely important. What makes us really tick is if someone has thought differently about something and not only incremental improvement about something—actually thinking in a novel way with a new kind of product or a new kind of business model.

That always gets us going a little bit extra that you don't only think better, and you don't only listen to what customers think they want, but you can understand what they should want. And being able to think and suggest something different, to say 'you should do it that way with this product'.

Overall, it's not going to be the best-looking pitch deck that wins, but the one that you get a sense that this founder really understands the market that they are approaching and really understands the problem and how their customers work and getting a sense of that understanding is the most important thing.

Q: Could you share with us what are some of the failed investments? What have you learned from any of the mistakes?

As a VC investor, you're always going to have a lot of failures because you're always following the Pareto curve. And even though you always think you're going to beat the Pareto curve, it always follows this 20/80, or even one in ten really successful companies, and then about half of them become nothing more, or maybe you just get your money back. That's just how the numbers work in our business.

I had one company that I didn't make the investment, but I became responsible for it really early on in Varenne, and it was a smart camera that you could share pictures on social media. This was a long time ago, almost eight years ago, and we decided to re-invest.

Then half a year later, we realized that the smartphones now are so good, there's never going to be a market for this product, unfortunately. So I should have never done that follow on investment; we could have realized directly that this is not going to happen.

That was one example. So it's always hard with the re-investment because you want to help the founders, and you want to still believe their vision, but then sometimes you just need to know that the market conditions might have changed from when you made the first investment, and it's not going to help anyone to keep it alive if it doesn't have customers or market to go to.

Investing in Skåne

Q: Rebecca, your team, has made a few investments in Skåne now, most recently investing in Occtoo, a Malmö based company. Would you please elaborate with us which were the reasons that made Industrifonden decide to invest in them?

We have a few investments in Skåne, which is great. And the Occtoo team were founders of one of our previous investments in Skåne, Inriver, so we knew the team from before.

We also knew that from the Inriver time, they had gained a lot of that unique insight that I talked about. Insight into customer pain points related to data infrastructure and how you manage your data as a retailer or e-commerce actor.

They saw that the product information management, the Inriver PRM system wasn't enough. There were more you could do with that data, combining it with customer data and external data to create really relevant customer experiences.

So we like their unique insight. And we like the team, of course, because we had worked with them before. And we were also happy that they wanted to work with us again. So that was a short background to why we wanted to invest, and we saw a lot of potential in what they wanted to build. But it's also about creating a new category, and that's kind of what they did with InRiver as well. That vision of a new category and data experience management got us going, so we like the vision, and we liked them.

Impact Investment

Q: If you had all the facts beforehand and could choose between investing in a company that would increase in value 100x or a company that would do 5x but decreases 25% of CO2 emissions guaranteed, which company would you choose? Are people in the VC world getting serious about wanting to change things, or are they just still looking at numbers?

I've seen a large movement in the VC world just the past year. There's a lot more talk on ESG questions and awareness in all the funds. And there are a lot more climate-tech focused funds coming up in all of Europe. And so something is bubbling and happening, and a lot is talk, and some is action as well. And I see funds that seem to genuinely want to make a difference.

There's the new SEB Greentech fund, there's Almi Greentech fund, Pale Blue Dot, and impact funds, so there are many new funds, especially focusing on climate and ESG. For us, being a foundation owned fund, if we could decrease carbon emissions by 20%, that will be a no brainer, for sure. And that would be valued a lot more than 5x. So we can think a little bit different. Our overall purpose is to make Sweden a better place, and that would definitely make Sweden a better place.

Q: Today's topic is the food industry. Rebecka, what made you passionate about the food tech companies or the food industry in general?

I've always been interested in food, and when I was quite young, I had a stomach disease that made me decide to be a vegetarian for many, many years. And I also found out a lot about food and how it could help me and it made me feel a lot better. So I can see how important food and eating the right things can be for your health.

I also worked as a student chef part-time when I was studying. So, I've always liked food on that amateur hobby level. I've done a lot of cooking, but I haven't done that many investments so far in food.

When I joined Industrifonden, I said, this is one area where we can have a lot of impact. And it's one of the things that we need to solve. We have an increasing population, we have climate change, we have so many challenges that food tech can be part of solving. So for me, it is necessary for Industrifonden to do more in food tech. Industrifonden has experience with Oatley, we have experience in Foodtech from before, so that's why I wanted to look more into it.